Australian Income Tax Law And Practice

Report on Australian Income Tax Law And Practice

QUESTION 1

1. The taxable income is determined under s4-15 wherein all deductions are subtracted from the total assessable income. In the context of given case scenario, Michael’s tax liability amounts to $122,000 (=$130,000-$8,000). This is only applicable for Michael as his wife is unemployed. The tax payable can be further bifurcated and presented as under:

Taxable IncomeTax on this income
$0 to $18,200No tax payable
$18,201 to $37,000$18800*19% = $3,572
$37,001 to $87,000$50,000*32.5% = $16,250
$87,001 to $122,000$35,000*37% = $12,950
Total Tax Payable by Michael$32,772 (=$3,572+$16,250+$12,950)

2. Mary’s Decor is a home decorators business operated by Mary with a total turnover of $350,000 for the current financial year. It is assumed that Mary is a Cash Taxpayer. Since the total turnover value includes a component of Credit Sales worth $60,000, their revenue would only be taken into consideration for tax purpose when such debts are actually realised by Mary from Accounts Receivables. The same applies for Interest payments realised worth $3,000 from the total of $8,000. Hence, the net turnover relevant for tax liability computation is $290,000 and Interest Payments received on overdue of customers is $3,000. Also, there are tax Thus, the total tax liability of Mary amounts to $65000 (=$290,000+$8,000-$3,000-$230,000). Hence, the total tax payable by Mary on their total tax liability can be bifurcated and presented as under:

Taxable IncomeTax on this income ($)
$0 to $18,200No tax payable
$18,201 to $37,000$18800*19% = $3,572
$37,001 to $65,000$28,000*32.5% = $9,100
Total Tax Payable by Michael$12,672 (=$3,572+$9,100)
 

Total Tax Payable = $12,022

3. As per Section 97 of the Income Tax Assessment Act, 1936, if a beneficiary is entitled to receive a certain amount from a trust, such an income would be included in their assessable tax income. Also, for this purpose, Section 95 of ITAA 1936 states that the total assessable income would treat such a beneficiary as a resident and would allow them with the eligibility to reduce such amounts by way of subtracting allowable deductions from it. In the context of given case scenario, the total assessable income of Peter is $22,000 and the total tax liability of Peter is calculated as under in pursuance of Division 6AA Income of Resident Minor Beneficiaries of ITAA 1936:

Taxable Income

Tax on this income ($)

$0 to $416

No tax payable

$417 to $1,307

$890*66% = $587.4

$1,308 to $22,000

$20,692*45% = $9,311.4

Total Tax Payable by Michael

$9,898.8 (=$587.4+$9,311.4)

4. Rankin Royal Marine Pty. Ltd. is a business whose turnover amounted to $6.5 million for the financial year. Since this amount is less than the prescribed threshold of $50 million, Rankin is identified as a small business and it will be entitled to a tax rate of 27.5%. Apart from this, the company had a deductions totalling up to $6 million. Also, the company sold its warehouse in July 2015 for $1.1 million which was initially bought by Rankin in February 2000 for $800,000. Thus, a capital gain of $300,000 (=$1,100,000-$800,000) is made by Rankin on sale of their warehouse. As a result, the taxable income for Rankin is $800,000 (=$6,500,000-$6,000,000+$300,000). Thus, the total tax payable by the company will be $220,000 (=$800,000*27.5%)

5. Michael Banner has applied for a job in London and intends to leave Australia. As there is no specific information provided in regards to his return, it is assumed that he may leave the country indefinitely. This evident with his decision to sell almost all of his possessions that are owned by him in Australia such as his car, paintings and a flat. As per ITAA, 1997, it is crucial for the taxpayer to be physically present in Australia for at least some time. Since this is not true in case of Michael, he will be treated as a Non-Resident of Australia in future years. However, for the purpose of taxing his income up to February 2016, Michael would be considered as an Australian Resident as he has never been outside of the country previously. He also receives fully franked dividend worth $7,000 which can be attributed as a tax credit that seeks to reduce Michael’s overall tax burden by eliminating the possibility of double taxation. Additionally, he was entitled to be taxed as per the provisions of Capital gains tax for the assets sold by him. This includes sale of car which amounted to a total capital loss of $12,000. Additionally, Michael sold some of the paintings he possessed in the following fashion:

Purchase price of painting

Sell Value

Tax treatment

$300

$800

Capital gain of $500 is disregarded as the initial acquisition cost of such a collectable was less than $500 as per s118-10(1).

$400

$60

Capital loss of $360 is disregarded as the initial acquisition cost of such a collectable was less than $500 as per s118-10(1).

$1200

$900

Capital loss of $300 is considered for CGT purposes as the initial acquisition cost of such a collectable was more than $500 as per s118-10(1).

Since, the aforementioned collectables were possessed by Michael for more than 12 months, they are entitled to a 50% discount as per CGT Rules prescribed by ITAA, 1997. Also, Michael sold his flat, which he initially bought in 2009 for $450,000 and rented to someone else, in January 2016 for $900,000. Here, the capital gain of $450,000 would be considered as per section 118-192 of ITAA 1997. Thus, total taxable income of Michael is $510,000 (=$70000−$7000−$3000+$450000). However, the tax payable by Michael would be:

Taxable Income

Tax Payable

Net Salary: ($70,000-$7,000 = $63,000)

$0 to $18,200

$18,201 to $37,000

$37,001 to $63,000

No tax payable

$18,800*19% = $3,572

$26,000*32.5% = $8,450